Can Anyone Talk to China Anymore? Probably Not

It's an increasingly important question for the United States and the rest of the world to ponder as the emerging giant asserts itself globally.

The House voted overwhelmingly last week to give President Obama sweeping authority to impose steep tariffs on Chinese imports. The move was aimed at retaliating against Beijing's monetary policy, which essentially keeps the value of the nation's currency artificially low so Chinese manufacturers can dump cheap exports on developed economies.

Whether the Senate will go along with the plan is still open to debate. But it's probably more pertinent to ask exactly what China would do if the U.S. actually did slap harsh tariffs on its goods? Based on China's recent behavior, any rash moves along those lines could trigger a deeply bitter reaction and possibly an outright trade war that, frighteningly, the U.S. would not win.

Consider that before the president's appearance in front of the U.N. General Assembly in September he had a two-hour meeting with Chinese Premier Wen Jiabao, in which he basically demanded that China stop manipulating its currency. China's response? Ho-hum. Precisely how much money do you owe us again?

Meanwhile, on the other side of the globe, Japanese manufacturing companies suddenly discovered that they'd been cut off from the rare earth minerals that they require to make high-tech products such as computers and cell phones as well as energy-efficient items like wind turbines and hybrid cars. What happened to Japan's rare earth imports? According to the Japanese government, China, which controls 93% of the global rare earth supply, decided to block shipments to Japan to score points in a diplomatic dispute. A few weeks earlier a Chinese fishing boat in Japanese waters crashed into a couple of Japanese coast guard ships. Japan seized the boat and arrested the captain. In response, China promptly detained four Japanese employees of Fujita Corp. on suspicion of filming a restricted military area in northern China.

So Japan proposed an exchange: the fishing boat captain in return for the four arrested Japanese citizens. But Japanese government officials say China balked and then, in an awesome display of economic power, simply cut off its rare earth shipments to Japan. The Chinese government denied the accusations, but true or not, Japan suddenly found itself in an unwanted trade war with its biggest trading partner. Through the first half of this year alone, China had bought $20 billion of Japanese government bonds and Chinese companies had invested roughly $120 million in Japanese businesses. This provided a needed boost to Japan's sagging economy.

Sensing the coming heat, the Japanese government acquiesced and freed the fishing boat captain on Sept. 24 with no strings attached. Only then did Beijing's rare earth minerals showdown ease. And last week, China released three of the Fujita employees it was holding. However, one Japanese citizen still remains in a Chinese prison cell, a bargaining chip for a later negotiation.

Why would China so brazenly challenge the world's economic powers like this? Because the country's leaders know what our leaders are only beginning to understand -- that China would probably win a global trade war.

In March 2009, the Pentagon for the first time held a series of economic war games exercises. The soldiers were Wall Street traders and executives, economists and academics. The weapons were stocks, bonds and currencies. The participants were divided into teams: the U.S., China, Russia, Japan, the European Union and so on. Then the teams were presented with different scenarios -- North Korea is imploding, a major global economy is melting down -- and told to do what was in their best interests. Our intelligence experts watched as the economic conflicts played out.

What the exercises showed was that the U.S. consistently lost to China in economic warfare. Part of the reason was that the U.S. could be easily distracted by expensive side conflicts that sapped our economic strength. But the more important reason was that China could inflict real pain on the U.S. without feeling it at home. For instance, by simply moving the maturities of some of its $850 billion in Treasury holdings from 90 days to 60 days, it could cause chaos in the U.S. stock markets. Or China could sell just a trickle of its U.S. financial assets and signal that it didn't have confidence in the U.S. economy, setting off a panic here.

The overall lesson from the exercise was that, for all of our saber-rattling, in our weakened economic state we have to be careful about poking this dragon. And what's more, everyone involved knows it.

So returning to the original question: Can anyone talk to China anymore? Sadly, for the time being it appears the answer is no.